Beruflich Dokumente
Kultur Dokumente
Lecture 1
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Take on board that nothing happens in isolation. Everything is relative right throughout the world.
Journalism is such that it is for the purpose of selling newspapers - not for the purpose of enlightening the population.
The newspaper however, is designed to be made available to those with a ~12 year old reading age. However, the
business press is one vehicle commended to see the things that were going to see here over the next two weeks; things
happening in the market place right now. There is interactions between individuals, communities, and companies.
Saving:
How do we save? - Dont spend
- When you think about spending, think about value. Are you getting value for what youre spending?
- Ask for a discount when buying something. Very few people do. Never be afraid of asking for a discount. There is
only two possible outcomes: no, or uhh.
- uhh - the element of confusion - this is when you ATTACK.
- Think about what happens in business: do you think they take the price of whatever products they need at face
value? NO. Thats not how business works. You dont have to pay the price thats on the tag.
- You want VALUE
- It may be the price thats on the card, but what is the price to you?
- What do you consider to be your non-spend
- every dollar you dont give to someone else is a dollar for you - this is the concentration of saving
Your life is no different to a business. What we learn today might not be necessarily appropriate in a year or twos time.
Things are always changing. e.g. now we have online shopping. Items thus come from overseas: no GST paid.
Therefore, as the government doesnt get GST - their revenue drops. And so the government changes its spending. The
government must watch their spending, as they dont have the same revenue stream as before. Furthermore, they can
increase taxes - e.g. income tax.
Out of your income stream is deducted tax.
Theantay Keo
Accounting 151G - 1
Discipline of spending:
- be focused before shopping
- dont be led astray by promotions or specials - be wary of these. There is the adage if it looks too good to be true,
then it is. There are various scams going on around the world; be careful.
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Good and bad is NOT a part of our language - everything is relative. One persons good/bad doesnt match
anothers.
- therefore what we have is either; acceptable, or unacceptable
- it will either increase our wealth in the future, or it will not
You will have the seeds of what you do in a particular situation, and how you go about the process is important. What
questions do you need to ask? What is it that will enable you to say, you accept/reject that
Be wealth accretive - make no apologies for wanting to be better off in the future than today.
In your working lifetime, it is predicted that there will no longer be a pension.
Some years ago; Warehouse introduced some new inventory system. This malfunctioned; ended up reordering a shit
load of stuff. Bad news - therefore share price dropped. However, all the ships arrived; and the Warehouse had a sale for
all the excess stock - sales increased. Profits increased. Good news = share price rises.
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Share price:
- is a function of
- a companys prospects
- its profitability
- good news
What we do know is that the market is efficient - and the market (everybody here - anyone who might be an investor)
responds to various stimuli and its all about news.
Good news = share price expected to rise. Bad news = share price to fall.
Example: Warehouse - bad news - share price dropping
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Accounting 151G - 2
Lecture 2
Think expansively. e.g. Think globally. Financial literacy isnt just about Auckland, or New Zealand - its about the
world. Where you fit in the world, and how the world could impact on you and your decision making.
Value judgements - we dont understand good or bad; only if it is acceptable or not acceptable. Good and bad is all
relative.
Value is different things for different people - we dont come up with a value of one thing; value changes over time.
You must therefore remain flexible. There is no end to anything. You might think that when you graduate; education
ends. But it is merely the beginning of something else; therefore, always, when thinking about an end - think of a new
beginning.
wtf is he some motivational speaker or some shit????
When things occur within a company that might impact on its valuation then there are rules of the stock exchange called
continuous disclosure.
- in other words, its incumbent for the companies themselves to keep the markets informed of anything that might
happen.
- Raycon decided to sell part of its operation in China to another company - this would ordinarily be information that
the market needs to know about - some part of its operation has been sold off. However, they took the view that the
purchaser had not paid the deposit and thus they didnt feel that the stock exchange (and therefore the market)
therefore be informed of this sale. The stock exchange reprimanded them severely as it is the event that matters; not
when it is completed. There is an intention to do something.
- and this is new information for existing investors or potential ones, to inform them of their decisions about
whether or not they want to continue to hold an investment
All of the things that we do are going to be available and be seen in the market - were going to do things about the
individual.
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Accounting 151G - 2
You need to get a job, its necessary - in order to achieve financial independence in the future.
- what sort of job/work? how long will it be around? do you need additionally studies to move up the ladder/gain more
flexibility/have greater opportunities?
In formulating the plans and process; and putting dollars attached to the process.
- it is this process and the ingredients going in that are important.
- Youve defined your goals; what you want, where you want to be, etc - and the process of getting there.
- But it doesnt stop there - it never arrives
- life changes - we take on a different direction, and therefore we might get a bit older, become a little wiser, and so
you may want to lift your horizon - elevate your goals - aim higher - but the process remains the same. You just
change the ingredients (i.e. your goals and plans).
Evaluate results
- then of course, from time to time, evaluate your own performance. You compare what your goals were - what you
wanted to do/where you wanted to be, with where you actually are/what youre doing.
- Youre now making comparisons against achievements against what your goals were
- it is an ongoing process- it doesnt stay constant.
- It is a dynamic event (as is business)
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What causes exchange rates to change? - there is a relationship between exchange rates and interest rates.
- Reserve Bank: prints money and are responsible, through legislation, to control inflation.
- when interest rates rise, other countries/people in other countries find this an attractive investment opportunity, so
they buy New Zealand dollars, and invest it in some sorts of financial instruments, in order to take the benefit of
higher interest rates.
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Accounting 151G - 3
Module 1!
Share Price
- The share price is a function of a companies prospects, profitability - it is a function of good news.
- the market is efficient, and the market (everybody who is a potential investor) responds to various stimuli - and it is
all concerning news.
- good news = share price rise
- bad news = share price falls
the warehouse is performing badly - why? - Globally, retailing has been difficult. Spending behaviour concerning retail
has changed. The Warehouse is currently reinventing itself - becoming more associated with branded products. And the
Warehouse has purchased Diners Club (credit card). We have yet to know the true purpose behind the purchasing of
diners club - more revenue for the warehouse? or will it be a stand-alone.
If something is imported it would have been sold in a currency other than NZD - you as a consumer are exposed to
currency fluctuation.
- NZD has been getting stronger relative to other countries - this makes imports cheaper
- and so you dont see any increase in prices because of currency
- e.g. would we see BMW or Mercedes change their value form one year to another due to changes in currency? No
- the company that does the importing wants stability too
- so, although imports may be cheaper, has it flowed over to us as the consumer?
- whether its inflation or interest rates and the relationship between them affects all of us
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Accounting 151G - 3
2. Develop plans
plans like superannuation/pensions
saving plans
investing more = might very well be a
different picture about where you might be in the future - it doesnt matter about saving, the concentration is
about not spending. Or when you are spending, making sure you get value for your spending. It is a VALUE
consideration. Just because the ticket price may say $10, it doesnt have to be
The difference between what the ask price is and what you paid is automatic saving.You dont have to
concentrate on saving - it is on not spending, unless youre getting something which is value.
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3. Implement plans
4. Develop budgets
putting numbers to it
is $1 million a lot of money? - it depends.
what will it look like in 20 years time though? - it is highly likely to be different. What will $1 million dollars be
able to do for you in the future? - its likely to buy you less in the future than today - the value of money changes
over time
INFLATION
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5. Evaluate results
6. Revise plans
7. and back to 1 - defining financial goals.
Be flexible
- always look for opportunities
- a plan is great, but go through life with eyes and ears wide open - watch, listen, analyse - where might the
opportunities be, and if they present, do you take them?
- be committed to where you want to be.
- interesting about life is it change direction time and time again
Redundancy
- when you are laid off due to being redundant or unnecessary
- new to this life time - today its written to every employment contact; its become commonplace
- this is due to companies today being constantly bought and sold off constantly
- today, one can have 3 different career changes on average. and also back then, you could work yourself up the ladder
within the same company - today, the probability of that is not so great
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Accounting 151G - 3
- loyalty has changed - but what came first, was it the corporate behaviour with its cost-cutting?
- loyalty no longer prevails
- and also applies to the employees view - why would the employee burn themselves for their employer
- it all comes back to what YOU want.
- YOU decide;
- have a plan, and put the dollar values to the plan - you need financial plans with budgets
This financial planning process is a never-ending scheme - because you have EVALUATION
- look back and determine whether or not you achieved your goal/how its coming along
- this is why you need flexibility - to deal with any setbacks or opportunities that come along
- it does NOT make the plan wrong - the plan is right, with the information and knowledge you had at the time. Its
just that things happen - things change.
Value for Value
- there is a time and place for everything, but keep in mind you want value.
Money!
All of the things we ultimately do is about money - that is what financial literacy is all about money. What do we do
with it, how do we get it, where does it go etc.
Gold standard:
- currency used to be based on gold - e.g. back then you could take $1 to exchange for $1 worth of gold
- German gold - held outside Germany. Germany, after the war shipped gold to America (and France and Paris);
about ~18 months ago, Germany asked America for the gold back - America declined.
- Why didnt they send it back? - because America probably lent it to someone else; we dont know where the gold
is - its all based on paper (currency).
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Everything changes - short term, medium and long term - the same as companies. Companies must plan for the future no good dwelling over the past. Short term/medium/long is different for different people - as well as for different
companies. e.g. in the wine business, by the time you get land, plant the vines, and they start producing a crop, its 6
years - to the wine industry its considere short term. Everything is relative
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Accounting 151G - 3
Young singles
young couples
young families
empty nesters
retirement
During your life, things will change - you will be quite different as a young single compared to when youre retired.
This is why the planning is dynamic - even in retirement you must plan (you dont know how long you live) - at some
point in time you die, you just dont know when. Therefore, you need planning e.g. whos going to pay for the funeral
(is there enough money for the funeral), how to pay the mortgage, etc - its all different, whether youve got families
etc, what might happen.
Benefit of planning:
your money works more efficiently for you by utilising the financial wonder; The power of compounding through
time
Taking money, and putting it into a bank that pays you interest.
Looking at how this works, growth of $1000 at 8% per annum, what is it worth in 40 years time?
- $1000 today invested, would give $21,725 in 40 years time
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Accounting 151G - 4
Lecture 4
A 2% difference in interest rate, when compounded, makes a major difference - especially more so over longer term of
investment.
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Life is a dynamic process. There is always something that could happen - and more things could happen than would.
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Simple interest - this is when interest is reinvested at the end of the compounding
period; and thus, accumulates.
(Simple interest is not important in this course)
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Accounting 151G - 4
The government is responsible for fiscal policy (a policy about budgeting for the economy as a whole in terms of the
revenue they generate largely from taxation).
The government has decisions about economic stability, and more importantly, about economic growth. It achieves this
stability and growth by maintaining employment levels. The governments income is all about taxation - i.e. they get
money from each and everybody who works, and companies, which pay taxation on their profits. The government also
has state-owned enterprises, e.g. power stations, dams, etc. These generate revenues for the government also. The
present government has been privatising a number of state-owned assets. Privatising means putting them into the public
sector, or, as we might say, the private sector when it becomes listed on the stock exchange. Thus, we have shares like
Mighty River Power, and Genesis Energy etc - which have been floated off to the private sector. The Government
holds only 51% of these companies, and the rest is with shareholders. However, most of the governments revenue is
still from taxation.
When we look at financial statements, we have something called a profit-loss appropriation account
This is an appropriation in terms of shareholder wealth - but when it comes to taxation, we could argue it is a misappropriation of some of the profits going to the government. Anything that the government buys/pays for comes from
taxation - we as the workers pay for it.
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The Reserve Banks (RB) job is to control the money supply. Currency in NZ is issued by the RB.
They are also charged with ensuring growth in the economy - along with the government.
In particular, the RB is involved in interest rates management.
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Accounting 151G - 4
- due to an increase in the OCR recently, people may have gone out and borrowed at 0.5% or 1% and continued to
buy NZDs all week - so that the announcement today may have little effect as it was always anticipated that would
happen.
All of this is about the control of inflation
By
increasing
the
OCR,
it
dampens
the
demand for money by making it more expensive. Value. If interest rates
increased, things change in value - if interest increases, then perhaps you need to borrow less. You cant afford a
higher interest rate - and this is one of the worries we have; that individuals are unable to make repayments when
interest rates rise. And the banks are mindful of that, and therefore therefore the RB demands that banks comply with
a ratio of what they lend. Even banks must change over time too.
The OCR is the rate that is transacted between the RB and other banks in New Zealand.
Inflation is what you try to control via the RB - changes in the consumer price index (CPI). Prices change - you cant
buy the same amount of goods with money today as you could in the past? - NO.
All of these things affect financial plans and goals. Hence, when it comes to voting/elections, you want to be rightly
interested in these things, as the politics will impact on your goals and aspirations.
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Accounting 151G - 4
can reach the depression stage. But during recovery, the government steps back in - buying back bonds, getting the RB
to issue more money/cash.
America has a different definition for the CPI, because not all goods and services go into their basket. There is a
whole lot of prices which ahem been going up in America, havent yet hit the statistics because those goods havent yet
fit into the basket of their goods, from which the CPI is measured.
Businesses in NZ are confident about the future.
When you first start work youre at the lower levels - but gradually, as you progress into more areas of responsibility,
so too will your income increase. Its not because youre older, its because youve got more experience - its because
youve got some qualifications that put you on higher levels. This experience generally comes with age, but not
necessarily age itself that determines ones income - more experience.
Whether marital status has any role in income is debatable.
Education is important in proving you have the qualifications for a job.
It is possible to have 2-3 career changes in your life.
A profession developed from the need of having to have somebody assist with looking after your future wealth. You
dont have to become an expert of all the financial instruments available to assist with your wealth creation, so that
when you arrive at a stage of your life you feel comfortable.
Diversification - dont put all your eggs in one basket. It is important to have different sorts of assets in your portfolio
for wealth accumulation.
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Accounting 151G - 4
Module 2!
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Nobody knows that interest rates will be like in 5-years time, but that doesnt stop us from planning our goals/budgets.
Financial statements and balance sheets are prepared today - and it is a result of the history.
The balance sheet is today; has nothing to do with tomorrow; what you owe/own is what you owe/own today. The
different, then, is what are you worth. It is a back-ward looking document. Companies also have annual reports - these
(like the balance sheet) are historical, theyre from some point back in time up til today, or it has a revenue stream over
a period of time.
Above is the leap between the vision, the plan, evaluating etc.
e.g. we want to reduce taxes - plan for that, and we convert that all into a budget, which would show expenses etc.
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Accounting 151G - 5
Lecture 5
Were trying to put together a setting for what you as individuals are about now, and for what you might hope to be in
the future and what decisions you may have to make - as you progress throughout life (different roles/jobs etc)
Why do we really want to make a financial plan? - its all for the purpose of creating wealth. We WANT to be better off
in the future than we are today. Exactly the reason why youre at university - for greater qualifications which lead to
better opportunities. All of the things that we do will be to lead towards accumulating greater wealth (in your own
terms). finances can be a stress on relationships. We can see that this financial security might be an important thing since
we cant see into the future to see what the government may do in the future - e.g. remove pension.
Therefore, its important that you are able to put into place some sort of planning to sustain wealth in the future - and set
out to achieve your goals. Were going to write down what it is our desires/wishes are - where do we want to see
ourselves in the future. Have a vision of where you want to be sometime later in lfie. Then we convert those visions/
objectives into a plan - something called a budget - we put NUMBERS to it. We obey these and live by it to achieve
our future goals. then well measure it against what actually happens in our life - how are we coming along in achieving
these goals of ours; this is evaluation. Note: everything changes. It is a dynamic process. This is why we must measure
what we want to do against what has actually happened.
Control of income/expenses: the easiest way to save is to not spend. Thats the first start - control the income, control
the spending and then when we get to the financial statements were able to draw up financial statements. What are our
obligations - what has happened to our net worth? where are we currently compared to a year/6 months/3 months ago in
achieving our goals? It is a dynamic process. and the same thing about income expenditure - what we believe were
gonna get x amount of income but for whatever reasons events may have occurred which could have for example cut off
our income stream - e.g. redundancy. Redundancy happens at a management level - not at an operational level - you
become the result of decision making at some higher echelon of the company.
Trying to manage academics is trying to herd cats
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Accounting 151G - 5
There are various changes that could happen during your lifetime. Be flexible.
Benefits is another form of saving - another form where money is taken from you and saved/invested for you.
More things could happen than will happen in life - it requires us to at least give consideration to them. Not all of these
events happen to everybody but they nonetheless require consideration. Any one of these events might rock our ideal
prospect of the future. You need to be flexible - you need to be able to update your thinking of where you are, and
where you next need to go.
For business:
continuity of earnings
competition
general economy issues
- interest rates
- exchange rates
recruitment
regulatory issues
Financial planning is not any different for the business - they too are concerned with their incomes/profits. They too rely
on an income/profit stream - they must rely on what theyre able to earn, spend and save.
The business must consider the competition - what happens when a new store opens up? It impacts on their earnings.
There are also general economic issues - e.g. exchange rates. If there are changes in exchange rates due to us importing
a significant number of imports we should expect exchange rates to increase. Thus, the exchange in relation to RB, have
relations to the interest rates. Therefore when interest rates go up we would expect increases in the exchange rate.
There is currently a direct relationship between the NZD and Chinese Yuan. Therefore you can directly trade one for the
other, unlike for example, having to sell to get USD then buying AUD.
Recruitment - considering recruiting the right sort of people to do the right sort of job. Regulatory issues set by
government - ongoing.
What we saw with compounding was the essence of the TVM. e.g. if you invest $1000 at 10% itd be worth $40k in 40
years time. This arithmetic is very straightforward. When we talk about financial statements, yes they add a whole lot of
dollars of different years together, but we cant do that when were looking at wealth creation. A dollar today is different
than a dollar in a years time. Weve talked about how even if it was in relation to inflation, buying something for a
dollar today wouldnt get you the same stuff youd get in the future.
Interest rates - include some value of inflation. Interest rate and opportunity costs is what its all about.
When we dont invest present money - it means were missing out on collecting interest. Its different in terms of
present value and future value. Present value is right now - since now is when were to make the decision. We cant
time travel. Its done and gone. Were looking forward in terms of the time value of money - see what it would be worth
in the future. Doesnt matter how long away your future is - anything related to the future is a future value.
Similarly there might be a time where youve got some future value you need - what might that value be TODAY?
Since we can calculate what the future value would be for a present invested value, we can go backwards and calculate
what we would need to invest today from a value/wealth we want in the future. By definition:
were COMPOUNDING when we go from the present to the future - depends on the interest rate
were DISCOUNTING when we go from the future to the present - depends on the discount rate
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Accounting 151G - 5
Single sum - one lump sum investment with no more additions or subtractions.
Annuity - a series of equal payments (or receipts) made at fixed time intervals for a specific number of periods.
A single sum like we saw the other day fro $1000, what would the value be in the future give a certain interest rate, and
invested for certain number of years. This is for just one sum of a thousand dollars.
An annuity is a stream of equal payments or receipts - a sum of money given for a fixed period of time, This can either
be annuities or payments or receipts in the same way as the single sum can be a single sum of a payment or a single sum
of a receipt.
- single sum vs stream of payments.
Formulas
What we have are some tables (appendices A-D)
financial calculators
internet calculators
All the tables do is represent different periods (first column talks about number of years - periods; i.e. not restricted to
just a year), period interest rates - giving factors, all relating to different interest rates and different time periods. Weve
got all these other things and you can go online and on excel and do the same thing - you should use these tables to
actually feel the dimension and way in which these numbers change over time - you can see what happens when interest
rates get greater and the time gets longer. You can see the dimension growing or contracting.
Is a future value going to be bigger than a present value if interest rates are positive - and the answer is yes. As youre
going to invest the money and so therell be more dollars - the power of compounding.
Conversely, $1 today vs next year; worth less. Looking at the present value tables, the further we get out in time the
smaller the factor; looking at the future value, the greater the factor with greater time.
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For the test you all need a calculator - one that adds, subtract, multiplication and division. Can use Graphics
Future Value!
is the value your invested money will grow to when earning a specific rate of interest over a specified time period
is the process of growing todays present value to a larger future value by applying compounding interest - known as
compounding.
The FV is some some in the future greater than the PV. Its the process of growing something from today to give a
greater value some time in the future.
FV = PV x (1 + r)n
The future value is the present value x some compounding factor, (1 + r)n
- given different ns and different rs
- can see tables for values
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Accounting 151G - 5
Ordinary annuity!
Definition: A constant flow (stream of receipts or payments) for a specific time
- the flow begins today. It commences now.
- e.g. hire purchase repayments, rent receipts - you must pay these so and so months for a certain period of time
What about if indeed we were to look at the table - what might that give us?
- look at the annuity table (App B)
- the FVA (future value annuity) factor is given as 7.716
- given that n = 6, r = 10%
- we attach this 7.716 to the regular stream of $5000 - giving $38,580
Weve looked at the future value of something - a single sum, and then we looked at a stream of payments. We cant
have an annuity of different numbers of dollars, they will all be single sums.
Looking at present values - going from the future to the present; how might this be
applied?
- say someone would be willing to give you $10k in five years time or so, what
present value would you want to be given that would be equivalent to $10k in five
years time?
- This is discounting - it is the reverse of compounding.
- PV = the FV divided by the present value factor. (also in our table appendices)
The magnitude - the further we are going out in time when going from the future to the present, i.e. discounting, the
further out the number of compounding periods and the higher the discount rate, the smaller the discount factor.
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Accounting 151G - 6
Future value - reflected on compounding (interest on interest) - the future value will always be greater than a present
value; a dollar today will have a bigger value in the future because of compounding. Conversely, the future value will
be in present value terms, greater than the present value.
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The balance sheet is the statement of your financial position at a point in time - it is e.g. at midnight on the 31st of
March/whatever date is. Often times its called the snapshot - its a snapshot of your particular position at a single
point in time. e.g. the Warehouse (p. 36-37) says balance sheet as at the 28th of July.
This is for a year - its for a period. It doesnt say anything about when the revenues was generated - just that over the
52 weeks they generated a particular profit etc
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Accounting 151G - 6
This is a simple exercise in saying that all of the assets will equal to liabilities (what is owed) + Net worth (aka equity).
The balance sheet always balances. Hence, balance sheet.
A = L + E
Thus, bottom line: the balance sheet is the snapshot of ones financial position at a single point in time.
We can also rearrange the terms - i.e. what is the net worth?
Net worth = Assets - Liabilities
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Your net worth is what you owe - but its what you owe to you. If you sell all your assets, and pay off all your
obligations (i.e. liabilities), whats leftover is yours and yours alone - its your net worth.
This is the same for companies like the WH. All of the assets, obligations and equity. Who owns the equity? - all of the
shareholders. All of the people that own shares. A proportion of the company is owned by shareholders; you yourself are
the sole owner - the sole shareholder of yourself. Youre your own little company. How cute.
Some peoples assets fall short of your obligations - i.e. you owe more than you own. What you dont have on your
asset side however, is your own knowledge - your own intellectual property. Your degree from university isnt
something you can easily put onto your assets - although it is one. What are trade-marks, patents, etc - same thing,
difficult to value.
- so remember, this is for an individual but its all the same for companies too
In the early years of your life youre in negative territory - youre consuming more than you are generating through
your income. Its not until youre mature and have some job where you have income generation in which you could
meet your commitments - thus, your net worth would become positive. If you do indeed have a negative net worth, it
could be you are insolvent. As opposed to when you have a positive net worth, in which case you are solvent
Companies also become insolvent; to the extent where individuals become bankrupt due to their inability to meet
payments or the demands of the obligations. In the case of companies though, they undergo liquidation (they start to
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Accounting 151G - 6
liquidate and sell off their assets). So yet again, reinforcing how what happens to you as an individual can happen to the
companies at large.
Revenue Statement!
Total Income Total Expenses
= CASH SURPLUS OR (CASH DEFICIT).
RS considers cash surpluses - but doesnt have to be cash. It could also consider income that is yet to be paid to you, but
you have already earned it.
The RS is a measure of your financial performance - for you as an individual, it also applies to a company.
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Fixed and known; e.g. rent or mortgage payments. Not paying either results in shit hitting the fan. Insurance; you must
insure your motor vehicle and the loan people who loaned money to purchase it demands insurance - same idea behind
the house. And some of these expenses are fixed
Variable; changes from time to time. It doesnt matter if you dont for example take your clothes to the dry cleaners this
month or the next etc. Food - perhaps dont go out for dinner, for that coffee etc.
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this all exists with companies as well. Decide what is a fixed vs variable expense
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- there is great importance in record keeping, in knowing what are the costs incurred either at a fixed or variable
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nature, and what have you spent it on. Measure the plan against actual (like companies too). It is important to
regularly update in accordance with the plan - e.g. companies have quarters (financial quarters).
It is the monitoring and then taking control; sometimes theres a phasing control i.e. spend money too early; spending
it this month instead of what we said we were gonna do, which is the next. It doesnt make the plane wrong it just
means that things have changed. Nothing stays constant.
We find that prices move - e.g. for the WH shares. This means that Net Worth changes as well.
Ratio analysis!
Financial ratios enable you to:
Track progress toward your financial goals; and
Evaluate your financial performance over a period of time.
given that we now understand what a financial statement (balance sheet) is (what we own - what we owe = net worth),
we would want to look and see what is the relationship between the two numbers. The bank is interested in knowing
whether you are able to repay loans/mortgages. The Financial ratio allows you to track your progress towards your
financial goals. It assists in evaluating what your performance is over time. We have a number of ratios well look at to
see what it might mean for us and individuals or as companies.
Were now considering solvency in terms of net worth and total assets.
What is the relationship between what we have as a company as equity (or you as an individuals = same thing), in
terms of total assets?
The solvency ratio means: of the total assets, how much of it (in percentage terms) do you actually own. Or inversely,
how much in % is owned by everyone else, in terms of obligations.
Balance sheet ratio shows the net worth of $40k (the larger the net worth, the greater the financial cushion), and it says
that this family (or company) could withstand a 25% decline in the value of the assets.
i.e. Net worth total assets
40k 160k = 25%
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And the greater this value - the greater the financial fall back you could have. Therefore, if these total assets were not
valued at $160k, but at 25% less, then the net worth would be equal to 0. Therefore who suffers from a decline int eh
value of the assets?
- first is the net worth (the shareholders). Because the liabilities or obligations are saying they need to be satisfied as to
the repayment schedules entered into, unless of course, you become involved and bankrupt (or the company goes into
liquidation). It doesnt matter than theres a decline in the value of assets sometimes - youre here for the long term.
- Therefore, any fluctuations in the value of your assets dont matter so much as you go through life. The further you
go into retirement the more certain you become that you want to be sure of your asset values. Therefore, what
happens is that your risk profile changes over time
- when youre in your 20s, youre more risky. Compared to your 50s youre much more conservative (generally).
Liquidity Ratio
(important)
This relates to the ability to have liquid assets (that is to say, cash/deposits/the ability to convert something immediately
into cash to be able to meet the current fixed and variable commitments). When were talking about the company were
talking about the current ratio - that is now current assets relative to current liabilities.
- the current assets, the short term assets; the biggest proportion of which is cash.
- relative to all of the obligations you have - i.e. your liabilities (what you owe).
Summary: it is the ratio between having readily available funds to meet your needs (liabilities) whenever it
demands
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This gives you a ratio (percentage) of 9.9% ~ 10%. therefore meaning that this family/company would be able to last
about 1.2 months with its available funds (i.e. 10% of a year = 1.2 months). i.e. they would be able to live for about a
tenth of the year, liquidating their assets to pay off their debts (they are able to go on a year on their current liquid
assets).
what we want to do then is measure this against some base measure. Is it the measure the bank wants, or the measure
as per your own projections, or is the the measure because on average the whole community has 1.5 months? [no
value judgement made]
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Savings Ratio
What is the available cash surplus being generated relative to the after-tax income. (when you get an income, the tax is
being taken out before you get it).
We discussed our propensity to consume. This is effectively the propensity to save.
Therefore:
the propensity to consume + propensity to save = income after tax
if youre not spending it, then by deduction you must be saving it.
How much of the after-tax income is being saved?
The relationship between the propensity to consume is preferred because it is the consumption that is in your power of
control. Your power of control rests with consumption. Therefore having controlled that this surplus is your residue.
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Accounting 151G - 7
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we must make estimations and assumptions. We must make estimates both for revenues and expenses and then we
prepare the cash budget. We can have a shortfall or a surplus; every year will be different. Needs change - income
levels change etc, requires flexibility - must be able to adapt to change.
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it is difficult to increase your income in the short term - and if you could, why not do it before? It is not likely that
you could increase your income overnight - but what you can do is decrease your expenditures - reducing your
outflow, rather than suddenly increase income. You could also depend on liquid assets.
Deficit spending!
Deficit spending causes you to:
- Deplete an existing asset
- Incur more debt
- Or both!
Deficit
spending decreases your net worth.
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If we continue to live beyond our means the it is wealth destructive - this goes without saying. You must cut the
cloth to suit - i.e. if this is what you want in the future then you must tailor yourself and your income stream to
reach that goal.
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the budget control system is really the essence of it all. Yes, you have a plan, but you must monitor it and see how
youre coming along. Evaluate progress. Dont forget that events occur and thus you must modify to include new
developments/events - this does not make the budget wrong. What it does do is that there were some events unseen
which are incorporated into the plan.
Module 3!
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were talking now about management - the role of cash management. What might there be in tools available for us to
assist with cash management and financial planning. When we look at a company and relate liquidity its about
having short term funds available to meet short term obligations.
For a company we generally talk about it in a 12 month period - but for individuals it might be monthly (what liquid
asset shave you got or are going to generate to pay for the obligations due). Where do you have the liquid funds or
income stream to be able to do that.
Were down to companies looking at things at a 12 month period - that is, their current assets and liquid assets, which
are largely about cash, inventory and people who owe the company money, and the liabilities that the company owes
to suppliers and staff - this is the same thing for us an individuals. It is a list of all the things owned/owed - and we
break down own into short term/long term; same thing done for obligations. Liquid assets can be readily converted
into cash.
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Accounting 151G - 7
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Make purchases.
Meet recurring living expenses.
Provide reserve for unexpected expenses or opportunities.
Used temporarily to accumulate funds for longerterm financial goals.
we need liquid access to make purchases. We need a reserve (nest egg) in the event some unforeseen circumstance
occurs in which case you need money. Accumulation of assets is something we want to do all round
We have this thing called insurance - its highly likely when you go to get a mortgage from the bank, they say they want
you to take a life insurance policy on either the owner or the bread-winner of the family (if theres only 1), so that in the
even any of them die you cannot rely on regular mortgage payments, and thus, the banks would take money from the
life insurance policy. Furthermore, the bank may require you insure the property; home insurance.
- Services: there are services out there to assist in putting together financial plans for you. They do taxes too.
- If you work for the warehouse and they pay a dividend then because the company has already paid tax on the profits,
you as the dividend recipient gets the benefit of the tax that has already been paid. We call those imputation credits.
And they are the value of the tax that has been paid by the company and are now being paid to you as the
shareholder. In tax preparation (not so much today) the company is required to deduct PAYE - i.e. they take out tax
from your income before even you get it - in the same way as dividends.
- Anyone who generates a commission for income could potentially have some conflict with the customer
- Our generation has probably generate door levels of wealth than any generations beforehand, and will likely have
generate more wealth than any generations to come.
- The number of trusts established in subsequent years is proposed to have been increased.
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Accounting 151G - 8
Lecture 8
Banks
Largest type of traditional financial institution.
Offer full array of financial services.
- fewer now than they were in the past (amalgamations and takeovers). Banks used to be locally NZ, but theyve
been mostly taken over by Australia or UK etc. They have a whole range of products - too many to list.
Building societies
Similar to banks in that they accept deposits and make loans.
Traditionally institutions that are mutually owned by depositors.
- largest lending is all about housing. Theyve extended the offerings of products over years, to the extent where
they actually become banks. These building societies we see are owned by its members
Credit unions
Provide financial products and services to specific groups of people who have a common tie.
Similar to building societies in terms of deposits and loans.
Typically pay interest rates higher than those of other financial institutions.
- established for specialist needs - the most recognised ones were for the public service investment society. i.e. it
was for public servants (those in the public sector) could treat it as a bank.
- typically pays interest higher - why? As you take on more risk you want greater reward - and so when we look at
the return one gets on government stock, it should be relatively risk-less. We expect the government to not default
on their borrowings - we would therefore expect a relatively and comparatively lower interest rate due to risk
minimisation. Therefore why this greater increased interest rate for credit unions?
- Credit unions too are owned by its depositors - they are the recipients then of benefits. Where companies might
pay dividends on shares, when youve got funds with an investment society such as Credit Union, not only does
will you get a higher interest rate because it represents part of the profit of that institution. Therefore you are
actually somewhat part of an owner if you invest in a credit union.
One must shop around when looking at banking institutions and what they offer - find the one best suited to your needs.
Nothing is for nothing; e.g. banks may say they dont charge you certain fees but you must have for example, ~$5000.
Therefore it raises the question, would you be better off depositing the 5k and not paying fees, or paying fees with less
than 5k? - its all dependant on you.What is the most beneficial product for you as an individual.
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- How does the share price relate to the index of the top 50 companies? - the index rises but the WH shares relative to
the index is less.
- Shares in part of a portfolio are part of the longer term horizon - and what sort of people are interest in a long term
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horizon and whos short; and compare to his horizon which is of shorter length than any of ours. This is because by
the time we get to kiwisaver hed be dead.
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Nominal:
is the stated rate and is generally in terms of a per anum rate/period
rate.
Effective:
annualised rate. i.e. talking about the issue of compounding; if you are
owed money (you have your deposits in the bank) would you prefer
the interest calculated monthly or quarterly; monthly, as you want
interest on the interest.
If youre owed money you want it sooner rather than later; and if you
owe youd rather not pay it at all.
We can see that we can convert a nominal rate into an effective rate because of compounding because we are ably to
earn interest on interest and so the more frequently it is calculated the more it is compounded and the greater the FV
will be. i.e. if interest is compounded more frequently than one time a year the effected rate is always going to end up
being greater than the stated nominal rate.
Conversely, if youre borrowing you want interest calculated less frequently (you pay less).
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Appendix a is made up of all those relationships for different rs and ms
0.05 is the 5%
divided by 2 (half a year), and to the power of 2.
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If someone says the interest rate is 12%, but if its calculated at the end of each other
month this means that the effective rate differs from the stated rate.
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Module 4!
Making car and housing decisions
- it is a mindset, it is a way of managing expenditures and investments.
- can be applied to more than just a car
Buying a car!
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you must do the research to understand what the market has on offer - what suits your needs? continually review
what needs are. Then negotiate the price. You have a very clear view of what your needs are, before entering into
anything. Having a list gives discipline to prevent impulsivity.
Choosing a car!
Factors to Consider:
Costs
Operating costs
New or used?
Size, body style, and features
Reliability and warranties
What to do with present car
Safety features
Insurance costs
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consider the costs - not just how much it takes to buy it but also how much it costs to manage it and maintain it
(operating costs).
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you cannot do enough comparison shopping - who will provide you with the best service and product for your needs?
Ask them what are the fees; thank you; go to the next. Make comparisons. Discuss the price first; but the most
important point up there is the last one. Be prepared to talk away - this is what happens at auctions. Everyone else
who was bidding before hand was prepared to walk away. Do not fall in love with it first-up; determine whether it fits
your needs. But prior to walking away establish negotiations. Lower the price. Or make a deal such as where you pay
some now, pay the rest in the future - this too is desirable. Because at least you could leave it in the bank and earn
interest.
Dont put all your eggs in one basket - diversify. Develop resistance like the bacterial scum you are.
What is the value of a property at a successful auction? - the value is to only one person. Everyone else is an
underbidder.
Lecture 9
Single family home is considered the most popular. Costs have increased majored in recent years. One of the major
construction firms may be taken on by the commerce commission for some sort of action about pricing - i.e. they might
be vertically integrated. They might be able to supply anything - and competition - perhaps they work together to keep
prices up. (like countdown or New World who wont price products). Homes may very well be a hedge against inflation
- but there are no guarantees.
Apartment
Can be flat, townhouse, or other building unit group title development.
Buyer receives title to an individual unit and jointly owns common areas.
Owner usually pays monthly body corporate fee in addition to mortgage payments.
Generally costs less than single family home.
- an apartment is on a piece of land
- land is the most expensive part of any house purchase.
- location location location
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When were looking at these costs - consider how much wed have to borrow. It doesnt matter what youre buying;
determine what you need, what would fulfil your requirements; and then the costs and after-care services.
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1. Deposit!
Is your equity in the house
Is paid at time of signing sale and purchase agreement
Lender will determine amount required
Sometimes mortgage insurance is required
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The RB has come up with loan to value relationships. Not so long ago, as inflation was highly prevalent in NZ, the
banks would lend you 100% of the value of the property. Then they would also pay for legal fees (conveyancing
fees to the lawyers needed to transfer properties over to you). Times have changed, and due to pressure on house
prices, the RB demanded there be a loan to value - which requires you to have a deposit (you need some equity) to
put into the house, and that is what you call the equity in your house. Different from the equity when you look at
financial statements.
The equity in your house is the part you own. e.g. buying a house which is say $100k and you need 20% equity need $20k. And the bank would therefore own $80k as they funded it. You enter into the contract and the lender
will decide on the basis of the house how much they will lend.
Mortgage insurance - when you have vehicles or assets you want protected you might take out insurance on that
particular product. Whatever it might be, you may want to cover it from perils. When youre talking about
mortgage insurance youre talking in terms of the life of the borrower, so that in the event of their demise the bank
can turn to the insurance policy to repay the mortgage - the bank doesnt kick out of the house the dependants.
This gives security, and banks may actually need you to have an insurance policy on the life of the borrowers; so
that not only is it security for you, but for the bank as well.
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Too many people forget about the add-on costs. These are negotiable. Shop around for lawyers - who suits your
needs. Its not just the price of the house alone that needs to be considered, one must also consider additional costs
e.g. for lawyers etc
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We have two components when we pay back a loan - we pay back the principal, P (what weve borrowed) and the
interest, I, on it.
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When people say house prices always go up, yes they do, but what might happen to your wealth? - you can see that at
an interest rate of 7%, if house prices are online going up by 1% you might say itll take a long time to accumulate
wealth. Therefore, is the house a worthy investment? - yes; due to reasons such as wanting to be in control of your own
investment opportunities, and your house is an investment in the same way you may have a term deposit in the bank.
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Further Example
How much interest would be paid if you had Annual payments? - i.e. only one payment per year (making it at the
end of each year).
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Therefore Annual Payment:
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Typically, homeowner to pay these expenses directly rates to the local city or municipal council (plus water rates)
and insurance premiums to insurer of choice
- need some perils insurance in the case of unforeseen events: for security for both parties involved.
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- you want the house to be in a good state of repair. You must maintain the house. If you dont the whole thing
falls apart and the value depreciates. Oftentimes, house buyers do not go and knock on the neighbours door.
Weve already considered how trustworthy real estate agents are (who works for who, really? - conflicts due to
different roles). Buyer beware.
Commissions are all a function of the value of the property - selling a more expensive house = more $$$ for the
real estate agent, for doing yet the same thing.
- if you take more risk you would want more reward. Problem is with more risk is you could potentially lose all
your principal. Dont put all your eggs in one basket. Need a spread of investment opportunities.
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- Happens all the time. you may come to a stage where you wonder if your lender (bank) is being nice to you.
Therefore you can shop around and look for other lenders elsewhere. Banks have trades between clients however, there are costs associated. Just because you have a mortgage for 30 years, doesnt mean youre
stuck with the same bank for 30 years. You can jump ship.
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